Functional Food Fever Hits Local Tastemakers: But Will Health Claims Heal Sales?

Deborah L. Cohen
March 13, 2000
Crain's Chicago Business

Local food companies seeking a cure for slow sales growth are hawking products that promise to prevent ailments ranging from nasal congestion to heart disease.

Quaker Oats Co., Kraft Foods Co. and Dean Foods Co. are offering vittles that claim to ward off all sorts of maladies.

Kraft's newly acquired Boca Burger line of soy-based burgers is said to help reduce the risk of heart attacks, while Quaker has been touting the cholesterol-reducing effect of oatmeal for a few years. Even chewing gum giant Wm. Wrigley Jr. Co. is wooing European consumers with gum said to ease cold symptoms.

The semi-medicinal claims of what are sometimes called "functional foods" go beyond the general nutritional benefits of traditional health foods.

In functional foods, the foodmakers seek relief from the stagnant package foods market, where sales grow an anemic 1% to 2% annually. Sales of functional foods -- a definition that has been stretched to include anything containing ingredients now believed to help prevent specific conditions -- are estimated by San Diego-based trade publication Nutrition Business Journal at about $20 billion annually, with a 10% growth rate.

"Food companies are starving for growth, and they see potential for it in functional foods," says John M. McMillin, a New York-based Prudential Securities Inc. analyst.

Functional foods got a big boost recently when the U.S. Food and Drug Administration (FDA) said foods containing soy proteins could claim to help prevent heart disease.

That endorsement helped dispel the tinge of quackery that accompanies such claims, along with risks of false-advertising liabilities.

"If the FDA says (manufacturers) can make a claim, they can make a claim and there's science behind it," says Fergus Clydesdale, head of the department of food science at the University of Massachusetts at Amherst.

Question of Demand

If doubts about veracity are easing, questions of demand remain. Foodmakers must convince consumers that functional foods offer a health benefit worth paying more for.

Benecol, a cholesterol-fighting margarine from New Jersey's Johnson & Johnson that sells for five times the price of traditional margarine, hasn't met expectations, analysts say. Johnson & Johnson wouldn't disclose Benecol's sales figures.

Functional foods won't be a hit unless their appeal reaches beyond wheat germ-munching patrons of health food stores. That means it has to taste good. Kellogg Co. of Battle Creek, Mich., recently discontinued Ensemble, a line of anti-cholesterol foods, after consumers rejected the fare as flat-tasting.

"Consumer acceptance just wasn't at the level we needed," a spokeswoman for Kellogg says.

These missteps haven't deterred local foodmakers.

"Our plans are very aggressive," says Greg Shearson, head of a functional foods joint venture between Chicago's Quaker Oats and a unit of Novartis AG of Switzerland. "We've got some very exciting products and projects already near completion."

Called Altus Food Co., the joint venture aims to link Quaker's marketing skills with the research prowess of Novartis. Mr. Shearson says Altus will start rolling out products in 2001, but won't say what's in the works.

Analysts expect Altus to begin with grain-based products -- cereal maker Quaker's strong suit -- which have been linked to a reduced rate of some cancers and heart disease.

Quaker hasn't made a Snapple-sized bet. The company won't disclose its investment in Altus, but analysts peg it at less than $25 million.

"I like the way Quaker's going about it, because they're not spending a lot of money," says Prudential's Mr. McMillin. "These are high-risk bets."

Veggie Burgers And Soy Milk

Kraft this year spent nearly $400 million to buy Chicago-based veggie burger maker Boca Burger and California-based nutrition bar maker Balance Bar.

Kraft, a Northfield-based unit of New York's Philip Morris Cos., wouldn't discuss overall strategy for the lines. But Kevin Scott, head of the Boca Foods unit, expects its sales of $40 million to double in 2000, for the second consecutive year, helped by the launch in coming months of new flavors including roasted onion, grilled vegetable and salsa.

Kraft also has said it may introduce new products such as cookies or pudding to help widen the distribution of Balance Bar products, which includenutrient-enriched snack bars and drinks.

Franklin Park-based Dean Foods Co., faced with sluggish milk sales, last year took a minority stake in Colorado-based White Wave Inc., producer of a soy milk called Silk.

Already, Dean has increased the number of Silk distribution outlets sixfold, says Dennis Purcell, head of the dairy company's specialty business unit. It's considering taking a larger stake in White Wave, which had roughly $21 million in 1999 sales.

And Dean expects to begin selling its own line of healthful dressings and other products to complement White Wave's offerings.

"I think this is the entry point for Dean Foods," Mr. Purcell says. "I see us looking at other natural foods-type of companies that can build around White Wave."

Not every local food company is joining the good-for-you movement. Chicago's Sara Lee Corp., a maker of hot dogs, other meats and baked goods, has no plans to offer functional foods.

"They are not a fit with the products lines we've got," a spokeswoman says.